2020 came with many (many!) challenges, but it had its good moments too. For me, one of those moments was to be invited to the Kilts Marketing Fellowship program. It is an honor to join 110 students, chosen over the last 12 years, to receive mentorship from a Booth alumnus, connect with faculty members, and attend exclusive marketing events such as the annual Fellows Luncheon.
Professor Avner Strulov-Shlain hosted the virtual Luncheon lecture, covering consumer behavior and pricing and, more specifically, the left-digit bias.
The “9-ending phenomenon” is pricing something at $2.99 instead of $3.00, or $999.99 instead of $1,000. This phenomenon created a left-digit bias, which is the tendency of people to over-emphasize the left digits, causing us to feel that $2.99 is much lower than $3.00.
Interestingly, I never questioned this pricing—it’s been part of my life since I can remember. Even more interesting: companies can’t explain why they do it, either. According to Professor Strulov-Shlain, who interviewed a few retailer executives on how they regarded left-digit bias, the answers were: they don’t think it matters, they’re not sure why they do it, and “it’s the way it’s always been done.”
Professor Strulov-Shlain’s study shows that left-digit bias is real, and it is not exclusive to low ticket prices. It’s also reflected on higher numbers such as property taxes, house sales, and car prices. The bias is seen in two ways: heightened sensitivity to dollar digit changes, and low sensitivity to cents. In response, stores should price just-below (e.g., $X.99) and avoid low-pricing endings (e.g. $X.19). In supermarkets, only about a third of products are priced at 99 cents, and the professor estimates there is a 1-3% potential profits on the table just by underestimating this bias magnitude.
But what if you can’t price at $X.99? In Israel, the one-cent and five-cent coins were abolished many years ago, and in 2013 the government declared that, starting in 2014, prices would have to be to-the-dime. This was particularly interesting to me because in Brazil, where I grew up, the one-cent coin was also abolished, but products continue to be priced at “non-existent” amounts.
So how did companies deal with 9-ending pricing? Most products became $X.90, as they should, but around 20% of products were rounded up. It took over a year for companies to adjust 00-endings to optimize for consumer bias, and it caused 7-10% less sales of these products in that period. My key takeaway from this lecture is to trust the data insights, instead of responding heuristically to consumer behavior.
Pricing and consumer behavior, especially through analytics, are topics that intrigue me. The world is full of data, and we marketers need to know how to understand it to optimize our decisions. Being a part of the Kilts Marketing Fellowship gives me access to lectures like this, 1:1 time with faculty, and a community of Booth alums in the marketing world that are one email away. So for me, a person who has a financial background and wants to pivot to a marketing function post-MBA, this is extra valuable, because opportunities like these are helping me close the gap of not having prior marketing experience and helping me pursue my goal.